American Psychological Association claims that monitoring progress increases one’s chances of success. Assessing people’s performance increases their accountability, facilitates learning, and boosts their confidence; thus, helping them achieve their goals.
No wonder, business organisations put a lot of time, money, and other resources into managing their KPIs.
What Is A KPI?
KPI or Key Performance Indicator is the metric that measure one’s performance and progress in the strategic areas associated with their success, especially in comparison with others.
KPIs are quantifiable measurements that evaluate how effectively an individual, department, or organisation is working towards their short and long-term goals, that is, they track their progress towards the pre-set objectives.
A noteworthy point is that KPIs differ with individuals, groups, and businesses. For example, marks obtained in a test may be a student’s KPI while a CEO’s key performance indicator is their company’s net annual profit. Return on assets, market share, and P/E ratio are the KPIs associated with businesses whereas an NGO can focus more on the number of blankets distributed by it.
Characteristics of KPIs
Effective KPIs are those that are described accurately. A good KPI has the following characteristics.
- Simple: The purpose of a KPI is to answer questions and not pose more of them. Therefore, whoever is laying them down should make sure that they have clear and concise definitions that are easily understood by the concerned parties. The metrics directed at the general public should especially not contain jargons and technical terms.
- Aligned: KPIs should be aligned with one’s goals to measure their progress in that direction. Also, an individual’s KPI should be aligned with the department’s which should further be aligned with the organisation’s. Furthermore, all the KPIs associated with a particular group should be in line with each other. They must complement rather than contradict one another.
- Comparable: Since the purpose of KPIs is also to assess one’s position with respect to their competitors, they should be expressed in comparable terms. Organisations also like comparing their performance metrics with their past records to evaluate growth. However, they must make sure that the comparison is valid. For instance, an increase in revenue with respect to data collected 30 years ago may not be a positive indication; a new firm cannot compare its market share with an established corporate giant.
- Actionable: A KPI should be able to prompt action. Therefore, leaders and executives must set the KPIs that they can account for and improve on.
- Time-bound: KPIs must be measured regularly. While not much time should lapse between two consecutive measurements, it should also not be very frequent. Therefore, while listing down the KPIs, organisations and team heads must also decide when to measure them, weekly, monthly, quarterly, or annually.
Examples of KPIs
KPIs vary as per the needs of individuals, departments, or organisations they are set for. However, some common KPIs used in the business world are listed below:
Examples of Finance KPIs
- Gross profit margin percentage
- Net profit margin percentage
- Current ratio
- Return on assets
- Working capital
- Operating profit margin percentage
- Cash conversion cycle
Examples of Marketing KPIs
- Cost per acquisition
- Cost per lead
- Cost per click
- Website traffic to lead ratio
- Engagement rate
Examples of Sales KPIs
Examples of Human Resources KPIs
- Recruitment conversion rate
- Cost per hire
- Training costs
- Employee turnover rate
- Overtime hours
- Average time stay
Examples of Management KPIs
- Customer acquisition cost
- Operating expenses ratio
- Net profit margin percentage
- Return on equity
- P/E ratio
Difference between KPIs and Metrics
People come across different quantifying measurements while working. This gives rise to a common confusion: are all these metrics KPIs?
Any quantifying term that measures an organisation’s characteristics or components is a metric. The daily footfall of a store, number of website visitors per month, and average click-through rate (CTR) are some commonly used metrics. However, they won’t be referred to as key performance indicators unless tied to a goal.
For instance, normally the number of followers of a business’ Facebook page doesn’t determine a key factor about it and is just a metric. However, when an organisation aims to increase its reach on Facebook, the same metric is a KPI. So, all KPIs are metrics but not all metrics are KPIs.
However, one must remember that this doesn’t reduce the need for tracking business metrics. Even if they don’t directly measure the progress of an organisation, they play a vital role in the assessment.
Types of Key Performance Indicators
KPI are divided into two types based on their nature:
- Quantitative: Quantitative key performance indicators are measured solely in terms of numbers, either whole or decimal. They are further categorised into two groups:
- Discrete: These indicators take only whole number values, for example, number of complaints, overtime hours, etc.
- Continuous: These accept decimal values as well; for example, net profit percentage and net customer acquisition cost.
- Qualitative: Qualitative KPIs track the effectiveness of a business process or decision. Although quantified (as all KPIs should be), they express opinions and characteristics, and are not completely numerical. For instance, customer satisfaction is a qualitative KPI.
Another way to classify KPIs is based on the point of the business process where they are recorded.
- Input KPIs: They measure inputs or the resources put into a business process, for example, financial investment, staff time, etc. Input KPIs keep track of the resources utilised during the course of work.
- Process KPIs: They are measured during the business process. Process KPIs help understand its efficiency and make the necessary changes.
- Output KPIs: Measured at the end of the business process, output KPIs define its effectiveness. The examples include profit, monthly customer acquisition, etc.
Importance of KPIs
Listing, tracking, assessing, and working on KPIs is essential to one’s growth, be it an individual, a team, or an organisation.
KPIs assess the current state of the organisation
It is said that one cannot manage what one cannot measure. This is why it is necessary to assess an organisation’s current state through metrics and KPIs are a sure shot way to go about it. They help evaluate an individual or organisation’s current health and decide which areas to improve on.
KPIs help set goals
After evaluating the present state of an organisation and its employees, leaders need to lay down the path of improvement. KPIs help them outline their strategic areas of improvement and set relevant achievable goals. For instance, if a company’s current sales growth rate (a KPI) doesn’t match the industry standards, managers may set higher sales targets following which the sales department works on it. However, the teams must consider their organisation’s ultimate objectives and long-term vision before setting immediate development goals.
KPIs monitor performance
Key performance indicators are measured regularly to keep track of one’s progress towards their goals. They help monitor the effects of individual and collective action on the wins and failures of the team.
KPIs ensure focus and flexibility:
When a KPI is laid down, stakeholders know what to work for. This helps them stay focused and ensures minimum deviation from the right path. However, if they see that their method isn’t yielding the expected results, they may also change tracks. Therefore, besides ensuring focus, KPIs also allow the organisations to be flexible.
KPIs encourage accountability, boost morale, and facilitate learning
Key performance indicators are the measurable results of stakeholders’ efforts. A positive indication motivates them to work harder while a negative sign points at their faults and asks them to improve on their strategy. A measurable proof of over or underperformance incentivises more than a vague assessment. Also, evaluating an employee’s KPIs in comparison with others ensures accountability and healthy competition.
KPIs track pattern
Many times, individuals and organisations fall into the patterns that hinder their growth. A KPI analysis helps managers to recognise these patterns, evaluate them, and break free from them.
How to Set KPIs?
More often than not, organisations follow industry trends and end up with the wrong KPIs. While taking note of the industry is mandatory, one must remember that key performance indicators are effective only for the individuals and organisations they are set for. Therefore, executives, managers, and team heads must take the onus to lay down the right KPIs.
- Understanding the organisation’s goals and objectives: One cannot work for a business before knowing what it is about. Therefore, managers and executives need to understand their organisation’s ideals, ultimate objectives, and long-term vision before laying down their KPIs.
- Reviewing the business state: To work towards a vision, one needs to analyse the present. An organisation must first assess its current state and then work towards fulfilling its short and long-term requirements.
- Laying down the immediate KRAs and KPAs: Key Result Areas and Key Performance Areas are the strategic areas that people must work on to achieve their short and long-term objectives. While KPAs are broader in perspective, KRAs concisely describe the most important tasks associated with a job. So, now that their organisation’s current state is known, leaders must list down their KRAs and KPAs. They must remember that these should again be line line with their long-term objectives.
- Listing the right KPIs: This is the most crucial step towards listing the right KPIs. Executives, managers, and leaders must decide on the relevant key performance indicators; these should be aligned with their organisation’s vision, KRAs, and KPAs. They must also be relevant to the industry and the current times. Furthermore, each department and individual should have their KPIs associated with a timeline.
- Writing down the KPIs: Since written matter is clearer and more authoritative than verbal decisions, the key performance indicators should be listed in a manner that is comprehensible to all those involved.
- Effective communication: Once the KPIs are finalised and listed, they are to be communicated among all the stakeholders, be it bosses, colleagues, or subordinates. This increases accountability and reduces the chances of error.
Measurement and Assessment of KPIs
Once the key performance indicators are listed and assigned to all, organisations must start planning their business processes and work on them to improve their KPIs.
However, just working is not enough. These KPIs need to be measured and evaluated regularly to assess their business plans’ effectiveness.
Any deviation from expectations calls for immediate action. Here, leaders must deal with the problem flexibly. While they should appreciate their strategy’s strengths, their weaknesses must also be accepted.
Moreover, a KPI may lose its relevance with time. Therefore, they must be reviewed and renewed regularly. Leaders must remember that their goal is to fulfill their organisation’s vision; key performance indicators just aid the process.
Go On, Tell Us What You Think!
Did we miss something? Come on! Tell us what you think about our article on key performance indicators in the comments section.
A finance enthusiast, literature beau and lifelong learner. Working her way up the success ladder and her personal philosophy textbook, Kavvya believes that a good conversation is worth more than a good book. When not working, she can be found reading, writing and engaging in long walks.